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Advanced Micro Devices (AMD - Analyst Report) reported earnings of 4 cents per share for the third quarter of 2013, above the Zacks Consensus Estimate of 2 cents per share, owing to solid execution and cost control management.

However, the higher-than-expected decline in AMD's larger core PC business led to a 6.6% drop in share price in after-hours trading.

Revenues

AMD generated revenues of $1.46 billion in the quarter, up 25.8% sequentially and 15.1% year over year. The sequential increase was better than management’s expectations of 22.0% (+/- 3.0%) and the highest sequential revenue growth in the past five years. The increase was driven by a 109.7% increase in the Graphics and Visual Solutions segment, primarily from the ramp up of semi-custom System-on-Chips (SoCs).

Revenues by Segment:

Computing Solutions comprised 54% of AMD’s sales in the last quarter, down 6.1% sequentially and 14.8% from the year-ago quarter. The decline was due to decreased notebook and chipset unit shipments, partially offset by an increase in desktop unit shipments.

AMD’s Graphics and Visual Solutions business generated the remaining 46% of its sales, up 109.7% sequentially and 96.2% from the year-ago quarter. The increase was largely driven by strong growth in the semi-custom business.

Operating Results

Reported gross margin for the quarter was 35.7%, down 380 bps sequentially but up 480 bps from the year-ago quarter. The third-quarter gross margin included a $19 million benefit from sales of certain previously reserved products.

Operating expenses of $426.0 million decreased 18.5% from $523.0 in the year-ago quarter. Also, as a percentage of sales, both research and development (R&D) as well as marketing, general and administrative expenses declined. As a result, reported operating margin of 6.5% was significantly above the year-ago quarter margin of (10.3%).

The quarter’s GAAP net income was $48.0 million or earnings per share of 6 cents compared with net loss of $157.0 million or loss of 21 cents per share reported in the comparable quarter last year. Excluding restructuring charges and intangible amortization charges but including stock-based compensation expenses, non-GAAP net earnings were $31.0 million or earnings per share of 4 cents compared to a net loss of $150 million or loss of 20 cents a share in the year-ago quarter.

Balance Sheet

AMD exited the third quarter with cash, cash equivalents and marketable securities of approximately $1.06 billion versus $968 million in the prior quarter. Trade receivables were $873.0 million, up from $670.0 million in the prior quarter.

During the quarter, AMD generated $21.0 million from cash for operations, spending $15.0 million on capital expenditures. Free cash flow was $6 million during the quarter.

Guidance

Management expects fourth-quarter 2013 revenues to increase 5.0% (+/- 3.0%) sequentially. Non-GAAP gross margin is expected to be 35%. Operating expenses are expected to remain flat sequentially at approximately $450.0 million.

For the full year 2013, capital expenditures are expected to be approximately $110 million, down from its prior guidance of $150 million.

Our Take

AMD’s top-line numbers for the quarter were better than its guidance, supported by new products and increased demand for the company’s new semi-customSoCs. The company’s bottom line also beat the Zacks Consensus Estimate. A more conducive market, increased game console wins, adoption of new products, position in graphics and good execution are expected to pull the company out of the weak PC market.

Additionally, the company is providing chips for game consoles to lessen the company’s dependence on the declining personal computer market. Management said that the company shipped millions of semicustom SoC products to both Sony (SNE - Snapshot Report) and Microsoft (MSFT - Analyst Report) for their soon-to-be-launched next generation game consoles.

We believe AMD is on the right track. It is trying to position itself strongly in the gaming market, which holds enough potential for growth in the next few quarters.

Also, during the quarter, the company made good progress into new embedded markets, including communication, industrial and gaming, among others. It expects to increase revenue contribution from its embedded business and increase market share. AMD’s new APUs, which power a number of thin and light-touch notebooks are expected to drive strong double-digit sequential increase in mobile processor unit shipments.

Currently, AMD has a Zacks Rank #2 (Buy). Other stocks that have been performing well and are worth a look include Freescale Semiconductor (FSL - Snapshot Report), Cirrus Logic (CRUS) and Avago Tech (AVGO). All these stocks carry a Zacks Rank #1 (Strong Buy).

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